Vail Daily column: What a trade war could mean for mortgage rates
February 10, 2017
There are few economic or political events in the world that don't end up impacting homeowners getting a mortgage. Sometimes they help and other times they hurt. Throughout time, various world banking crisis', economic calamities, trade deals, weather events and political upsets have come and gone, but each has left their mark on the current price on one commodity and that is money.
One thing that few people consider impacting the price of mortgage money is the cost of tomatoes, electronics and cars. The U.S. imports tens of billions of dollars of these items (along with many others) from Mexico.
In some cases, such as tomatoes, there are few jobs lost because the areas of the U.S. that could grow vegetables year around is limited and to have a reliable and affordable supply it is necessary to import them from Mexico which not only has a ideal climate but cheap labor. For other products, it can be argued that goods could be manufactured in the U.S. and create jobs. In response to that side of the coin, President Donald Trump is threatening to impose unheard of taxes on all Mexican imports (including those that we likely could not produce ourselves year around in sufficient quantities), as much as 20 to 30 percent. The way the pricing markup works is that the importer of the good will generally do a flat percentage markup on the cost of the good plus the import tariff. This means that if a product cost $1 and incurred a 25 percent tax the importer will pay $1.25. If the importer doubles the price when he sells it, then the end price goes from $2 to $2.50.
Higher Cost of Living
Apply that math to not only vegetables but to autos, appliances, electronics and other items and you have a very noticeable impact on the cost of goods and services in the U.S. This means that the consumer price index will start to rise, and that means inflation to the cost of living.
In addition to declaring a trade war with our southern neighbors, Trump is also pulling out, or wants to pull out of the Trans Pacific Partnership trade agreement, which encourages free trade between the U.S. and eleven nations (including those Australians that he seems to suddenly dislike).
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One of the key factors for keeping mortgage rates low has been the lack of inflation. The dirty little secret that few like to talk about is that a large part of the reason we have not had inflation is due to low cost food and consumer goods imported into this country. The really difficult to reconcile question is determining what the true cost of having cheap consumer goods is. Certainly some U.S. jobs have been lost because products can be made in Mexico or China using cheap labor. On the other hand, the U.S. exports hundreds of billions worth of goods to Mexico and the Pacific Rim nations creating jobs here. If U.S. made goods face high tariffs going into other countries, then we will export less and that will cost jobs.
My feeling overall is that the U.S. benefits more than it loses from free trade agreements, and I fear that a sudden and drastic increase in food and other prices resulting from a trade war with Mexico would have a negative impact on the U.S. economy and we could see a huge jump in mortgage rates, which would slow down the housing economy and cost jobs in many U.S. industries. Inflation is a very destructive economic condition, and history is littered with failed economies that were overrun by skyrocketing prices and shortages of basic staples and goods.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtn mortgageguy.com.